Gold Is At The Center Of The Storm

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Includes: AAAU, BAR, DGL, DGLD, DGP, DGZ, DZZ, GLD, GLDI, GLDM, GLDW, GLL, IAU, IAUF, OUNZ, PHYS, QGLDX, SGOL, UBG, UGL, UGLD
by: Oleh Kombaiev
Summary

Gold is at the peak of its sensitivity to external drivers.

Now it is not even possible to say exactly which gold driver is the key one.

Gold will not stay at the current level for long.

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It is always interesting to see how gold correlates with other markets. This helps to better understand which driver is the most important for gold at the moment. But the current situation deserves to be considered unique.

Over the past five years, the gold price has shown a negative correlation with the dollar index. Now the short-term correlation between gold and the Dollar Index has reached its five-year maximum, which actually means the functional relationship when the dollar decline is clearly translated into the rise in the gold price. Against this background, Trump's desire to weaken the dollar provides a strong support to the gold market.

Judging by the last five years, gold does not tend to correlate significantly with the S&P 500 index. But now the inverse correlation between these markets is over 50%. In other words, now the S&P 500 decline is coupled with an increase in the gold price. And vice versa. That is, we can assume that the role of gold as a protective asset has increased dramatically.

Considering the correlation between gold and the Chinese yuan renminbi (CHN/USD), we also have a unique case. The correlation coefficient has reached 50%, which is already worthy of attention.

Finally, let's look at the correlation between gold and the Volatility Index (VIX). Here we also find a direct correlation, which has increased up to the highest historical values and which makes gold grow when the stock market volatility increases.

So here's what I can tell by looking at these graphs.

In short, now gold is at the center of the storm. The deadlock in trade negotiations between the US and China leaves the world economy to face an almost inevitable recession. This is translated into lower long-term rates and increased volatility of the stock and currency markets. In turn, gold, which plays a number of different roles (protective, saving), is at the peak of its sensitivity to external drivers. And now it is not even possible to say exactly which gold driver is the key one.

I do not know in which direction the gold price will change in the near future. But one thing is certain: gold will not stay at the current level for long. Beware of the calm before the storm!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.